by Leon J. Owens
It’s all about rational decision-making.
I first became involved in the world of real estate investing right out of law school. At the time, “location-location-location” was the value mantra promoted by professionals on every side of a deal. Sellers priced properties based upon local area “comps,” lenders considered street addresses and zip codes as the only true collateral, and real estate investing commitments were made solely upon appraisal data. That was the industry mindset when I began my real estate investing career by developing major multi-family residential projects lying in the path of population growth in Southern California’s Inland Empire and in Scottsdale, Arizona.
I soon learned, however, that the mantras of brokers and bankers aren’t really enough to guarantee a return on your investment dollar. Like the world of journalism, the bottom line of a successful entrepreneurial real estate deal requires an awareness of five fundamentals:
- Who? Who are you, really? Do you have the technical expertise to understand the highest and best use, income, comparable sales, cost, and completed value analysis? Without that expertise, you’re not an investor. You’re a gambler.
- What? What will it take to get into a deal in terms of financing? Simply “thinking” the money will always be there for what you may think is a promising opportunity is never enough to secure the acquisition even on a short-term option basis. You need to have the skills to conduct a meaningful financial analysis and the calculations to support it.
- Where? Are you entering a rising, static, or falling marketplace environment? Swimming against the tide and picking up “a good deal” in a declining market may consume resources long before that tide turns.
- When? Just because you’re “ready” to make a deal, is it really the right time to commit to the investment? Real estate success is all about the timing…and if your timing is off, your chances of a successful outcome are nil. Have you made a search for alternative investments and used units-of-comparison benchmarks? Is your prospective entry and exit calendar realistic or simply wishful thinking?
- Why? Do you have a concrete, specific rationale for the investment you’re thinking about? Are you buying the real estate or the anticipated income? Have you identified all potential income benefits (cash flow, tax advantages, loan amortization, capital appreciation) and weighed them against worst case outcomes? Have you formulated specific investment criteria…and then followed them?
The basis of all successful real estate investments is making rational decisions. This is where a seasoned, experienced professional—someone who has a personal and professional familiarity with projects small and large, someone who has the skillset to guide clients, partners, and investors through the forests of distractions and “appearances”—comes into play.
My work with both managerial and investor clients begins by developing a list of specific criteria that includes equity requirements, cash flow realities, reasonable return expectations, 360-degree risk assessments, and complete operational demands. The last thing anyone wants at any stage of the process are the all-too-frequent “surprises” of unanticipated assessments, health & safety compliance issues, or suddenly feeling the pinch of insufficient reserves. Everyone investing or speculating in real estate has limits, and only by acknowledging those limits can anyone hope to achieve a profitable objective.
At Cienega LLC, the first thing we do for our real estate clients is to apply careful thought and financial discipline to any proposal. Standing beside our clients as we guide them through a structured decision-making process, we never lose sight of the full range of personal, financial, and marketplace realities…or of the fact that our client’s personal guarantee is on those loan documents.
A disciplined and structured approach to real estate matters is the cornerstone of our success…and of yours.